"Revenue Shock" Forces States To Cut Capital Spending By Up To Rs 2.7 Lakh Crore: ICRA

State governments are expected to cut their total capital spending by Rs 2.5 lakh crore to Rs 2.7 lakh crore ($33.61 billion to $36.3 billion) due to the strain the coronavirus pandemic has put on their revenue, rating agency ICRA said on Wednesday.

It said states' debt levels were also expected to deteriorate sharply to 28.9 per cent of gross state domestic product in the fiscal year to March 2021 compared with 21.9 per cent in 2018/19 and an estimated 22.3 per cent in 2019/20.

The sample of states surveyed include 12 of the biggest, whose combined gross state domestic product was equivalent to three-quarters of national GDP in 2018/19, ICRA said.

"The pandemic has dealt a sharp revenue shock to the state governments in the current fiscal (year)," Jayanta Roy, group head of corporate sector rating at ICRA, the Indian arm of global ratings company Moody's Investors Service, said.

Though central government collects the bulk of the taxes, it is the states which do most of the expenditure, including on education, healthcare, law and order.

ICRA said with the states' revenues falling sharply, most of their enhanced borrowing would go towards funding the deficits, leaving them with little option other than to substantially compress capital expenditure.

ICRA said that given the adverse impact of COVID-19 crisis on the tax revenues of central government and the excess tax given to states in 2019/20, the centre is expected to provide only 5 trillion rupees to states in FY21, versus the budgeted amount of Rs 7.8 lakh crore.

"Some states are assessed to report revenue deficits as large as the entire financing envelope available to them, implying severe cuts in capex may be on the anvil," Roy said.